Rating Rationale
January 05, 2024 | Mumbai
Neogen Chemicals Limited
Ratings upgraded to 'CRISIL A/Stable/CRISIL A1'; rated amount enhanced for Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.680 Crore (Enhanced from Rs.464.5 Crore)
Long Term RatingCRISIL A/Stable (Upgraded from 'CRISIL A-/Positive')
Short Term RatingCRISIL A1 (Upgraded from 'CRISIL A2+')
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Neogen Chemicals Limited (NCL; part of Neogen group) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Positive/CRISIL A2+’.

 

The rating action reflects improvement in business risk profile backed by expected growth in revenue with sustained operating margins. Business risk profile remains comfortable marked by expected improvement in scale of operations in fiscal 2024, group has achieved scale of operations of Rs ~340 crores till H1FY24 as against Rs.296 Crores for similar period during FY 23. With new facility and higher demand, scale of operations is expected to improve over the medium term which will remain monitorable. Scale up in capacity utilization rates, improved contribution from custom synthesis & contract manufacturing segment and advanced intermediaries is expected to support growth and profitability. 

 

While group is undertaking major debt funded capex which is expected to moderate financial risk profile over medium term, group has partly mitigated the project risk with moderate demand risk mitigated by strong EV demand and longer tenure debt. Risk associated with ongoing project and its impact on financial risk profile will remain key monitorable. The group had raised equity of Rs 253 crore in November 2023 to part fund this capex, indicating ability of the group to raise fund from the market.

 

Implementation risk is mitigated by past track record of delivering on its enhanced capacities and value added ancillary chemistries. However any further debt funded capex will be a monitorable.

 

The ratings continue to reflect an established market position in the specialty chemical segment, healthy operating efficiency, and a moderate financial risk profile. These strengths are partially offset by large working capital requirement, exposure to foreign exchange volatility and to changes in government regulations.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has consolidated the business and financial risk profiles of Dhara Fine Chem Industries, BuLi Chemicals India and Neogen Ionics Limited (wholly owned subsidiaries). Together these are referred to as Neogen Group

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

  • Strong business risk profile marked by established market position and healthy operating efficiency: The group has a strong market position in the developing bromine and lithium derivatives because of integrated operations and a strong clientele. The product portfolio is diversified, catering to many business segments including pharmaceuticals, agrochemicals, others etc.

 

Further, group has entered into an agreement with MU Ionic Solutions Corporation, Japan to design electrolyte manufacturing plant. MU Ionic Solutions (MUIS) is a JV between Mitsubishi Chemical Corporation (MCC) and UBE Corporation.

 

Ongoing capex for capacities in lithium ion battery material segment should support growth over medium to long term.

 

  • Moderate financial risk profile: Neogen has moderate financial risk profile, as reflected in the moderate capital structure and debt protection metrics. Gearing and total outstanding liabilities to adjusted networth was at 0.76 times and 1.19 times respectively as on 31st March 2023.

 

Considering recent fund raise of Rs.253 Crores, Gearing and total outstanding liabilities to adjusted networth expected to remain below 1 as on March 31, 2024. Considering expected larger capex improvement in debt protection metrics will remain key rating sensitive factors.

 

  • Extensive industry experience of the promoters: The extensive experience of the promoter and the proven track record in developing new products has helped them to steadily ramp up their scale of business and timely increase the installed capacity to cater to the increasing demand. Longstanding extensive industry experience of the promoters is expected to support the business risk profile, over the medium term.

 

Weaknesses:

  • Susceptibility to stabilization risks associated with lithium salt project: Group is exposed to stabilization risk for proposed lithium salt project. However, the group's track record of calibrated expansion strategy with a prudent funding mix of debt and equity, promoters experience and technology tie up with MU Ionic Solutions Corporation, Japan aid the business risk profile. CRISIL Ratings will continue to monitor said project.

 

  • Exposure to foreign exchange volatility and changes in government regulations: Group derives around 48% of its revenue from exports to multiple geographies and hence exposed volatility in foreign exchange rates. However, the risk is partially mitigated by imports of around 45-50% providing a natural hedge and monthly price reset arrangements with its customers to pass through foreign exchange movements. Bromine, being a corrosive and hazardous material, is subject to environmental and other government regulations. Any adverse change in these regulations, in any of the markets it operates, could impact the business risk profile of the group.

 

  • Large working capital requirement: Gross current assets (GCA) were 307 days as on March 31, 2023 (296 days as on March 31, 2022), driven by debtors and inventory of 100 and 207 days, respectively. Receivable’s cycle is driven by credit of up to 90 and 120 days provided to domestic and global customers, respectively.  Inventory level was higher since group maintain inventory to tackle delay in shipments and supply disruptions. Diverse product profile and many products without dedicated reactor capacity has also led to higher inventory. Inventory cycle is expected to remain on similar levels over medium term. The overall working capital cycle is expected to remain large with GCAs of around 200-220 days over the medium term.

Liquidity: Strong

NCA is expected to improve to Rs.70-80 crore per fiscal over the medium term against debt obligation in the range of 30-40 crore per fiscal over the medium term. Average utilization of bank lines has been moderate at 76.4% over the past 12 months ended in Sept 2023.

Outlook: Stable

CRISIL Ratings believes the business risk profile is expected to benefit from its established market position, enhanced capacities and new products & customers being introduced.

Rating Sensitivity factors

Upward Factors:

  • Higher than expected increase in revenue and earnings before interest, depreciation, taxes and amortization (EBITDA) increasing above 18%  leading to higher-than-expected cash accruals and debt to EBIDTA of below 3 times
  • Sustained financial risk profile backed by healthy capital structure, healthy ramp up of operations and strong debt protection metrics
  • Timely completion of milestones of ongoing capex along with ramp up of installed capacities

 

Downward Factors:

  • Deterioration in credit risk profile of the group, due to higher than expected debt, delay in ramp up of operations or any significant cost overruns, thereby impacting the financial risk profile.
  • Higher than expected debt-funded capex or acquisition, weakening financial risk profile with debt-to-EBIDTA remaining above 6 times on sustained basis.
  • Weak cash accrual on account of suppressed operating margin or weaker demand or slower than expected ramp up in new installed capacity.

About the Group

NCL was incorporated in 1989, promoted by Mr. Haridas Kanani. The company manufactures bromine and lithium-based organic and organo-metallic compounds, used in the pharmaceutical, agricultural chemicals, and engineering industries. The manufacturing units are at Mahape in Navi Mumbai, Maharashtra, Vadodara in Gujarat, Dahej SEZ Gujrat, Patancheru,Telangana and Pakhajan Gujrat . The company made an IPO in May 2019 and is currently listed on the Bombay Stock Exchange and the National Stock Exchange

Key Financial Indicators

As on / for the period ended March 31

 

2023

2022

Operating income

Rs crore

686.19

487.25

Reported profit after tax

Rs crore

58.17

46.61

PAT margins

%

7.27

9.04

Adjusted Debt/Adjusted Net worth

Times

0.76

0.55

Interest coverage

Times

3.86

4.54

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs. Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Cash Credit NA NA NA 30 NA CRISIL A/Stable
NA Letter of Credit NA NA NA 37.5 NA CRISIL A1
NA Long Term Bank Facility NA NA NA 215.5 NA CRISIL A/Stable
NA Term Loan NA NA Mar-29 12 NA CRISIL A/Stable
NA Term Loan NA NA Mar-29 86 NA CRISIL A/Stable
NA Term Loan NA NA Mar-28 78 NA CRISIL A/Stable
NA Term Loan NA NA Mar-29 13 NA CRISIL A/Stable
NA Working Capital Facility NA NA NA 8 NA CRISIL A/Stable
NA Working Capital Facility NA NA NA 75 NA CRISIL A/Stable
NA Working Capital Facility NA NA NA 25 NA CRISIL A/Stable
NA Working Capital Facility NA NA NA 75 NA CRISIL A/Stable
NA Working Capital Facility NA NA NA 25 NA CRISIL A/Stable

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Dhara Fine Chem Industries

Full

90% subsidiary of company

BuLi Chemicals India

Full

wholly owned subsidiaries

Neogen Ionics Limited

Full

wholly owned subsidiaries
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 642.5 CRISIL A/Stable   --   -- 07-10-22 CRISIL A-/Positive 27-01-21 CRISIL A-/Stable CRISIL BBB+/Positive
      --   --   -- 14-09-22 CRISIL A-/Positive 25-01-21 CRISIL A-/Stable CRISIL BBB+/Stable
      --   --   -- 10-08-22 CRISIL A-/Positive   -- --
      --   --   -- 07-01-22 CRISIL A-/Stable   -- --
Non-Fund Based Facilities ST 37.5 CRISIL A1   --   -- 07-10-22 CRISIL A2+ 27-01-21 CRISIL A2+ CRISIL A2
      --   --   -- 14-09-22 CRISIL A2+ 25-01-21 CRISIL A2+ --
      --   --   -- 10-08-22 CRISIL A2+   -- --
      --   --   -- 07-01-22 CRISIL A2+   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 30 DBS Bank India Limited CRISIL A/Stable
Letter of Credit 37.5 State Bank of India CRISIL A1
Long Term Bank Facility 215.5 State Bank of India CRISIL A/Stable
Term Loan 86 HDFC Bank Limited CRISIL A/Stable
Term Loan 13 Axis Bank Limited CRISIL A/Stable
Term Loan 12 Axis Bank Limited CRISIL A/Stable
Term Loan 78 Kotak Mahindra Bank Limited CRISIL A/Stable
Working Capital Facility 75 Axis Bank Limited CRISIL A/Stable
Working Capital Facility 25 Kotak Mahindra Bank Limited CRISIL A/Stable
Working Capital Facility 8 DBS Bank Limited CRISIL A/Stable
Working Capital Facility 75 State Bank of India CRISIL A/Stable
Working Capital Facility 25 HDFC Bank Limited CRISIL A/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Chemical Industry
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

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